Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds' moves.
Healthcare Services Group, Inc. (NASDAQ:HCSG) investors should pay attention to a decrease in hedge fund sentiment recently. Our calculations also showed that HCSG isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to analyze the new hedge fund action surrounding Healthcare Services Group, Inc. (NASDAQ:HCSG).
How have hedgies been trading Healthcare Services Group, Inc. (NASDAQ:HCSG)?
Heading into the third quarter of 2019, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards HCSG over the last 16 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Citadel Investment Group was the largest shareholder of Healthcare Services Group, Inc. (NASDAQ:HCSG), with a stake worth $18.8 million reported as of the end of March. Trailing Citadel Investment Group was D E Shaw, which amassed a stake valued at $15.2 million. Two Sigma Advisors, Giverny Capital, and Renaissance Technologies were also very fond of the stock, giving the stock large weights in their portfolios.
Seeing as Healthcare Services Group, Inc. (NASDAQ:HCSG) has witnessed declining sentiment from hedge fund managers, logic holds that there exists a select few hedgies that slashed their positions entirely heading into Q3. Intriguingly, Matthew Hulsizer's PEAK6 Capital Management cut the largest stake of the 750 funds followed by Insider Monkey, valued at an estimated $2.3 million in stock. David Costen Haley's fund, HBK Investments, also dropped its stock, about $1.6 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 1 funds heading into Q3.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Healthcare Services Group, Inc. (NASDAQ:HCSG) but similarly valued. We will take a look at Altra Industrial Motion Corp. (NASDAQ:AIMC), Insmed Incorporated (NASDAQ:INSM), Korn Ferry (NYSE:KFY), and Worthington Industries, Inc. (NYSE:WOR). All of these stocks' market caps are similar to HCSG's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AIMC,14,272459,-8 INSM,23,596261,5 KFY,22,134563,1 WOR,13,61991,-4 Average,18,266319,-1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $266 million. That figure was $101 million in HCSG's case. Insmed Incorporated (NASDAQ:INSM) is the most popular stock in this table. On the other hand Worthington Industries, Inc. (NYSE:WOR) is the least popular one with only 13 bullish hedge fund positions. Healthcare Services Group, Inc. (NASDAQ:HCSG) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately HCSG wasn't nearly as popular as these 20 stocks and hedge funds that were betting on HCSG were disappointed as the stock returned -19.2% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.